Plaintiff (Law Firm, Attorneys Jeon Sung-sung et al., Counsel for the plaintiff-appellant)

Defendant Co., Ltd. (Law Firm Lee & Lee, Attorneys Gangnam-yeong et al., Counsel for the defendant-appellant)

September 20, 2007

1. The issuance of new shares with a face value of KRW 5,00 per face value per the Defendant on April 21, 2007 shall become null and void.

2. The costs of the lawsuit are assessed against the defendant.

The same shall apply to the order.

1. Facts of recognition;

The following facts are acknowledged in each entry of Gap1 through 6, 8, 13, Eul evidence, Eul 4, 5, 12, 15, and 19 through 21, without dispute between the parties or by considering the whole purport of the pleadings.

A. On June 18, 1999, the Defendant was an unlisted corporation established by dividing it from Non-Party 4 Co., Ltd. with the main purpose of manufacturing, selling, etc. of machinery and parts thereof. Before issuing new stocks on April 21, 2007, the total number of issued stocks was 517,48 shares. Of them, the Defendant’s officers and employees owned 52.05%, Non-Party 4 Co., Ltd. 18.04%, and other external shareholders owned the remainder. The Plaintiff owned 125,514 shares, which are 24.25%, and was in the position of the largest shareholder.

B. On February 9, 2007, the Plaintiff, as a shareholder, was refused to request the Defendant to peruse and copy the articles of incorporation, minutes of the general meeting of shareholders, accounting books and documents, etc., and applied for a provisional disposition on the perusal and copy of the accounting books, etc. to this court. On April 9, 2007, the Plaintiff and the present management side of the Plaintiff and the Defendant were punished for dispute over the company management and their leading power.

C. Accordingly, on April 19, 2007, the Defendant held a board of directors to issue 155,246 common shares (30% of the total issued shares) to KRW 7,500 per share (5,000 per share) to Nonparty 1 Co., Ltd. (hereinafter “Nonindicted Company”) with the main purpose of manufacturing, selling, etc. of mining machinery and parts, and decided to set the due date on April 20, 2007. The Defendant issued the said new shares on April 21, 2007 (hereinafter “instant new shares”) and completed the registration of modification on April 23, 207.

D. According to the issuance of new shares in this case, the non-party company becomes the largest shareholder holding 155,246 shares (23.08 shares) out of the total number of issued shares, and the plaintiff's previous shares fell to 18.65 percent. Meanwhile, Article 10 (1) of the defendant's articles of incorporation provides that "the shareholders of this company have preemptive rights in proportion to the number of shares owned, and the shareholders have forfeited or lost preemptive rights or have a fractional share price at the time of allocating new shares, shall be dealt with according to the resolution of the board of directors." Paragraph (2) provides that "Where the shareholders of this company have preemptive rights in proportion to the number of shares owned, and the shareholders have waived or lost preemptive rights or have a fractional share price at the time of allocating new shares, the company may allocate new shares or preferential shares to persons other than the shareholders within the extent not exceeding 30/100 of the total number of issued shares," etc.

E. Accordingly, with respect to the issuance of the instant new shares, the Plaintiff filed an application for a provisional disposition prohibiting voting rights based on the said new shares with the court 2007Kahap228 and received the decision of the acceptance on June 7, 2007. On June 9, 2007, the Plaintiff proposed a revision of the articles of incorporation to include (i) the issuance of convertible bonds to a third party, (ii) the number of directors, (iii) the appointment of directors, and (iv) the appointment of Nonparty 2, the auditor, etc., (iii) the dismissal of Nonparty 5, and (iv) the appointment of the Plaintiff, etc., which requires a special resolution under the prohibition of voting rights of the non-party company, (iii) the special resolution falls short of the quorum (i) the quorum, (ii) the resolution falls short of the quorum, and (iii) the resolution falls short of the general quorum (no. 58%) the general quorum.

F. As of June 9, 2007, the shares of the Defendant appear to have been distributed, such as Plaintiff 19.35%, Nonparty Company 23.08%, Defendant’s representative director Nonparty 52.33%, and Nonparty 4 Company 13.8%.

2. Determination

A. The parties' assertion

(1) The plaintiff's assertion

The issuance of new shares in this case was made by Nonparty 5 in a way that the current management was evenly allocated new shares to the non-party company for the purpose of defending the management right while there was a dispute over the management right between the plaintiff and the defendant representative director, the non-party 5 and the plaintiff lost his status as the largest shareholder. Thus, the issuance of new shares in this case is invalid.

(2) The defendant's assertion

The Defendant issued the instant new shares to Nonparty 4 Company with excellent technical skills for the purpose of improving the financial structure through the introduction of technology on small CNC product, the improvement of business performance through close business cooperation, and the repayment of debts under the aggravation of business management, which bears approximately KRW 4.4 billion against Nonparty 4 Company. Therefore, the issuance of the new shares in this case is valid.

B. Determination

(1) Article 418(1) of the Commercial Act provides that "a shareholder shall have the right to receive allotment of new shares according to the number of shares he/she holds." Paragraph (2) provides that "a company may, notwithstanding the provisions of paragraph (1), allocate new shares to a person other than a shareholder as prescribed by its articles of incorporation: Provided, That this shall apply only where it is necessary to achieve the managerial purpose of the company, such as the introduction of new shares and the improvement of financial structure." Paragraph (1) of the same Article provides that where new shares are allocated to a third party who is not a shareholder, control over the company, such as voting rights, etc. in proportion to the number of shares owned by the shareholder, shall be reduced. In addition, the above Paragraph (2) provides that "a shareholder shall have the right to receive allotment of new shares in accordance with the number of shares held by him/her," and that "a company may grant a person other than a shareholder the right to manage the new shares to a third party except in exceptional cases where there is an inevitable need to protect the existing shareholder from exercising the right to new shares."

(2) The following circumstances, which are acknowledged as above or above, were the following evidence: (i) the Plaintiff and its neighboring personnel recommended as the Defendant’s director, etc. at a regular general meeting of shareholders; (ii) the Plaintiff applied for perusal and copying of the account books, etc.; (iii) the Plaintiff and the Defendant’s current management, such as the Defendant’s rejection; (iv) the Plaintiff’s control over the previous management, instead of becoming the largest shareholder due to the issuance of new shares, has been weakened; (v) the Defendant’s board of directors adopted a resolution on the issuance of new shares by the third party allotment method; (v) the Plaintiff’s claim for maintenance of the issuance of new shares, etc. on June 9, 2007, which practically obstructed the Plaintiff’s remedy; (v) the amendment of the articles of incorporation, such as limitation on the number of directors and exclusion from the cumulative voting system; and (v) the Plaintiff’s main purpose of the Plaintiff’s preemptive right to the issuance of new shares, which could not be seen as being an urgent measure to exclude the Plaintiff’s management participation in the Plaintiff’s management relationship.

(3) Therefore, the issuance of new shares in this case is null and void since it was conducted in a manner that unfairly infringes on existing shareholders’ preemptive rights.

3. Conclusion

If so, the plaintiff's claim shall be accepted on the grounds of its reasoning, and it is so decided as per Disposition.

Judges Shin Young-chul (Presiding Judge)